Actually, Economists Who Know Arithmetic Are Not "hopeful that families will continue to pick up the pace of purchasing"

Saturday, 01 May 2010 07:16

In an article discussing the first quarter GDP data the NYT told readers that: "Economists are hopeful that families will continue to pick up the pace of purchasing and make the recovery more sustainable." Economists who know arithmetic (admittedly a tiny subset of economists as evidenced by the failure of almost the entire profession to see an $8 trillion housing bubble) are unlikely to share this perspective.

Tens of millions of baby boomers are at edge of retirement. Because of the collapse of the housing bubble and the resulting destruction of home equity, the vast majority of people in these cohorts has almost nothing saved for retirement. The median net worth for older baby boomers (people aged 55-64) is around $180,000. This means that if they took all their wealth (including their current home equity) they would have approximately enough money to pay off the mortgage on the median home. This would leave them with absolutely nothing to support themselves in retirement other than their Social Security. The median net worth for younger baby boomers (people aged 45-54) is approximately $80,000.

The workers in these age cohorts desperately need to be saving more for retirement, especially in a context where the Peter Petersons and Robert Rubins of the world are devoting enormous resources to try to cut their Social Security and Medicare. For this reason, economists who know arithmetic are not hoping for a consumption led recovery. They are hoping that the government will take further measures to stimulate the economy. These measures could also boost private sector investment. Economists who know arithemtic are also hoping that the Obama administration will take steps to end the dollar's over-valuation, thereby leading to more net exports.

Unfortunately, because economic policy is dominated by economists who do not know arithmetic, we may be dependent on consumption to drive the recovery.

The contribution of stocks to net worth is quite high now compared to historical levels, and fundamentals indicate that prices are higher than only a few times before 1995. Of course it is mostly the upper-income people who own the stocks, and have been feeling the apparent benefit of the recent bull market. This probably includes media pundits and maybe most economists. These people don't see why those in lower brackets can't spend like they do.

Is the "The median net worth for older baby boomers" individuals or families?? If it's individuals, a family of two would have $180k ($90k each) AFTER paying their mtg. If it's for individuals, those sole homeowners can't even pay their mtg. thx.

Where is this consumer led recovery supposed to come from with 10% unemployment? Are we supposed to rely on trickle down from the Goldman Sachs banksters?

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Hunh?written by ellen1910,
May 01, 2010 3:39

The median net worth for older baby boomers (people aged 55-64) is around $180,000. This means that if they took all their (including their current home equity) they would have approximately enough money to pay off the mortgage on the median home.

Doesn't the accounting term "net worth" mean that whatever mortgage balance (liability), if any, this cohort might have, its amount has already been subtracted from their total assets?

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JOBSwritten by bakho,
May 01, 2010 4:23

Obama has been a huge disappointment because he has failed to deliver adequate stimulus to address the high unemployment. Conservative governors are using their budget shortfalls to attack public schools and teachers unions and forcing thousands of teachers out into the street. I wish we had a president who placed a much higher priority on jobs.

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...written by diesel,
May 01, 2010 8:21

Dean said, "They are hoping the government takes further measures to stimulate the economy." when what they should be doing is using their $180,000 as startup money for a daring entrepreneural venture which bootstraps the entire economy, propelling both themselves and the rest of us into a new era.

Barring that they should, as a service to future generations of taxpayers, have the courtesy to kill themselves, eliminating thereby the burden of support they so selfishly place upon the young. Self euthanasia packets will be available soon for those considerate enough to excercize this option.

This message brought to you by Friends of Friedman and Pals of Peterson.

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Hoping vs. assumingwritten by nassim,
May 01, 2010 11:40

Could it be possible that most economist are politicians. They are not saying that they assume that the destitute middle class will spend as much as before the housing bubble burst, but they are HOPING that that would happen. So, they can hope as much as they want, and I can hope for a new head of hair, I don't assume I am going to get one, and I don't assume the middle class will find a replace their home plastic-card home.

Lets "hope" the wealth that has trickled up will get spent.

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...written by John Lee,
May 02, 2010 4:03

Note to ellen1910 -- So what's your point? Let's say I have $180,000 net worth, inherit my parents' home, sell it, then use the proceeds to pay off my mortgage. Now my net worth is, say, $380,000. Having been retired for almost four years, I certainly wouldn't want to face the rest of my life with that amount as a supplement to Social Security.

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...written by skeptonomist,
May 02, 2010 10:48

It should always be kept in mind that financial industries, which include most aspects of the real estate business, always want to increase the importance of the wealth effect because it causes people to put their money into speculative efforts to improve the value of assets. Thus they have supported many tax manipulations which ostensibly increase the well-being of lower- and middle-class people but tend to backfire on these people when the inevitable bubble develops. In addition to the the mortgage-payment deduction, this includes the multitudinous retirement plan deductions. These things can all be considered to be part of the anti-Social-Security effort. It is difficult for most people to see the ramifications of the tax laws, and when the media - including supposedly "liberal" outlets like the NYT - are controlled by big-money interests they never find out about them.

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...written by JBG,
May 02, 2010 11:01

John Lee, I believe Ellen's point is that it is difficult to carry on a conversation if the meanings of key terms are indeterminate. "NET worth", as Ellen indicates, is usually calculated after ALL assets and liabilities have been accounted for. I imagine Ellen is as puzzled as I am that Dean would use a standard term in a non-standard way. (Maybe he was thinking of just liquid assets?)

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...written by Queen of Sheba,
May 02, 2010 6:47

No rational adult now living through this economic horror story is going to return to spending by incurring debt. No doubt future generations will once again fall through this rabbit hole, but no one should expect that to happen anytime soon - certainly not soon enough to rescue us from the current mess.

There needs to be a new economic paradigm. I'm damned if I know what it could be, but even economists who know arithmetic don't seem to have any ideas.

When you're losing at poker, you have three options: leave the game, bluff and hope you're not called, or kick over the table and draw your gun. Well regular folks don't have the option of leaving the game, and they've already tried bluffing and had their bluff called. The only option left is to kick over the table and draw.

I wish some smart someone would give us another option.

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...written by John Lee,
May 02, 2010 8:30

To JBG -- Well, of course, you and ellen1910 are absolutely correct, but will you at least concede that millions of Americans in their late 50s and early 60s (perhaps a majority) are approaching retirement in parlous condition?